WASHINGTON -- The District of Columbia is facing its worst financial crisis since entering the public credit markets in 1984 and "must make drastic cuts to regain budget control," Moody's Investors Service said yesterday.
The rating agency said "it is hard to envision a long-term solution without additional federal support or expanded local revenue raising power" because the worsening financial problems are so big and complex.
But the district's relationship with the federal government is increasingly uncertain as public and congressional scrutiny of the district increases in response to the budget stress, Moody's said.
This relationship is "important" because the federal government makes a substantial payment to the district -- $660 million in fiscal 1995 -- and approves the budget, sets debt limits, and controls some of the district's revenue raising powers, Moody's said.
Mayor Sharon Pratt Kelly and Mayor-elect Marion Barry are scheduled to meet with Moody's and Standard & Poor's Corp. analysts on Monday. District council chairman David Clarke may also attend the meetings, which initially were planned for this Friday.
Moody's rates the district's uninsured general obligation debt Baa and its insured debt Aaa. Standard & Poor's rates the district's uninsured GO debt A-minus with a negative outlook, and its insured debt AAA. The district has about $3.4 billion in outstanding GO debt.
Standard & Poor's recently issued a credit report sounding warnings similar to Moody's and calling for "strong management action" to control the budget.
The district's political and labor leaders must take "rapid action" to stabilize the financial decline, Moody's said. The district historically has been unable to make deep budget cuts, so even with political and labor support, "balanced operations may not be achievable unless almost immediate action is taken," the rating agency said.
"To close fiscal 1995 with balanced cash operations, the district must cut expenditures by $522 million, or raise revenues," Moody's siad. Any delays will require even deeper cuts, it said.
Moody's faulted the district council for not acting sooner on $140 million in congressionally mandated cuts that Kelly proposed in October. Since then, district officials have projected an additional $291 million budget shortfall for fiscal 1995, which would bring the deficit to $431 million. Fiscal 1995 ends Sept. 30.
Barry has yet to recommend specific cuts, but Kelly officials have said he agrees with their budget assessment.
To be effective, any budget balancing program must have a detailed strategy that specifies time frames and deadlines and provides for extensive reporting and monitoring, Moody's said.
The district cannot issue deficit funding bonds without compromising its capital program because of the district's debt limits, Moody's said. "Even if Congress relaxes the debt limits, the district's debt burden is already very high, especially if its sizable pension obligation is also considered," it said.
Debt service cannot exceed roughly 14% of revenues.